SIE (Securities Industry Essentials) Practice Exam

What monetary policy action takes money out of the money supply?

1. Reducing interest rates

2. Buying government securities

3. Decreasing the reserve requirements

4. Increasing the reserve requirements

The correct answer is: Increasing the reserve requirements

Reserve requirements refer to the percentage of deposits that banks are required to keep on hand and not lend out. An increase in reserve requirements means that banks must keep more money in reserve, therefore taking money out of the money supply and decreasing the amount available for lending. This is a contractionary monetary policy action. Option A Reducing interest rates is an expansionary monetary policy action, as it encourages borrowing and investing, leading to an increase in the money supply. Option B: Buying government securities is also an expansionary monetary policy action, as it injects money into the economy and increases the money supply. Option C: Decreasing the reserve requirements would also be an expansionary monetary policy action, as it allows banks to lend out more money and increases the money supply.